Government Maintains Private Financing despite Low Interest Rates

THE HAGUE, 21/08/13 - Private financing of public projects has become unattractive due to the extremely low interest rates that the government currently pays. But the cabinet is still pursuing the approach, mainly to polish up the budget.

Private financing of roads and buildings only makes money for the government if market players work much more efficiently than the public works department civil servants. This is because the government can borrow much more cheaply than commercial companies. The State only pays around 2 percent interest on a 10-year state bond, while investors demand a yield of 6 to 8 percent on corporate bonds.

"Public-private partnerships (PPPs) are therefore only interesting when on an investment of 100 million euros, market parties can achieve 4 to 6 million euros in efficiency benefits every year compared with the government,” says public sector economics professor Flip de Kam. “This seems to me rather a lot, and has as far as I know never been achieved.”

PPPs do however have one advantage which the State would prefer not to attract too much attention. Private financing relieves the budget and therefore the national debt. Now that the government has to make big savings to remain within the budget deficit ceiling of 3 percent of GDP, this is attractive. “The real reason that the government is going for private financing is that the budget is relieved in the initial years,” says De Kam.

In private financing, the government pays market players an annual fee. As a result, the cost of constructing a motorway is spread out over a period of 30 years. If the central government were to finance the project fully itself, the total costs would descend on the budget at one go.

The finance ministry confirmed in a reaction that the present interest rate level is disadvantageous for PPP projects. But halting such projects is not being considered. “We will continue with PPPs,” said a spokesman.

In total, there are some 20 projects, of which some are already at the tendering stage. These include the widening of the A1/6/9 from Amsterdam to Almere. For new projects, the government tries to offset the rising interest rate differential with market players by taking on a larger portion of the financing itself, according to the spokesman.